Buying a new vehicle is a big commitment. You may have planned to spend the next 5-10 years driving your new car, but the 15-minute test drive proves inadequate to get a good feel of the performance and features. It's not a surprise that many car buyers want to exchange their vehicles soon after they purchase. Trading in your car for another model of equal value may come to mind as a solution, but it's not as simple as swapping a set of keys. Learn how the trade-in process works, how to time the trade-in, and whether you should swap or hold onto your current vehicle.
How the Trade-in Process Works
Before you can exchange that minivan you bought for the SUV you really want, you'll need to understand the dealership's trade-in process. Regardless of whether you bought the vehicle a few weeks ago or several years have passed, the process of trading in won't look much different. The dealership will examine your vehicle's condition and set a trade-in value based on the market value from sources like Kelley Blue Book.
Factors that determine trade-in value include your vehicle's make and model, its condition (including any damage), and how long you've owned the vehicle. The odometer reading will also be taken into consideration, but mileage plays less of a role than the car's condition in the trade-in value.
Another component to consider is depreciation. Even if you recently purchased the vehicle, the toll of depreciation can be significant. A new car can lose 10% of its value as soon as it's driven off the lot and up to 20% within the first year. This means you shouldn't expect to get $30,000 back on a vehicle that you paid $30,000 for, even if it was just a couple of weeks prior.
If you're trading in a financed vehicle, and you have positive equity, the dealership will cover the rest of the loan and subtract the equity from the price of the new vehicle. If the new vehicle costs less than the total equity you have in your current car, the dealership will provide a check to cover the difference. On the other hand, if you have negative equity, or are upside down on your loan, you'll have to pay the difference out of pocket, roll up the debt into a new loan, or buy a substantially less expensive car.
Timing is Everything
Timing will be of the essence when you'll looking for a good deal on your trade-in. Some dealerships will allow you to return or trade in a vehicle you just bought out of good faith since there is no legal "cooling off" period with a new car purchase. To increase your chances of successfully returning the vehicle, contact the dealership as soon as you've realized you made a mistake, and discuss the options.
If it's been several months or years since you bought the car, you'll likely have to go through the traditional trade-in process. Consider how much value the car has retained since you bought it and compare that to the price of other vehicles you're considering. More recent models will hold more value than older cars, but depreciation can still knock down the value. Using our previous example of a $30,000 vehicle, after a year of ownership, you may be looking at 20% depreciation (or $6,000), which means you'll only have $24,000 to put towards a new vehicle.
The combination of high depreciation and a small down payment often leads to an upside-down car loan immediately after the purchase. Negative equity is problematic if you decide to trade-in shortly after the purchase since it will require you to pay the difference or roll up the debt into a new loan which can begin a cycle of debt.
Does It Make Sense to Trade My Car In?
Whether or not you should trade your car in depends on why you’re looking to swap, how much equity you have, and the car's current value. Because you’ll have to pay for taxes, registration, and title fees on the new vehicle, trading-in can mean paying thousands of dollars more than expected.
If you simply don’t like the vehicle you bought, make sure you have positive equity before you trade-in so you can put the equity amount towards a down payment on a new car. Negative equity means you’ll have to cover the difference out of pocket plus fork up all the fees for the new vehicle. If it's possible, we recommend paying down your current car loan until you're no longer upside down before trading in.
You will need to account for the depreciation that can cut into your vehicle's value when choosing your new car if you don’t want to pay more for the swap. This means downgrading to a less expensive brand, a smaller vehicle, or a used model to break even. Another option is to sell your vehicle on your own instead of trading in at the dealership. On average, sellers get up to 20% more for their cars when they sell vs. when they trade it in.